Is good natured Products (CVE:GDNP) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that good natured Products Inc. (CVE:GDNP) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for good natured Products

What Is good natured Products's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 good natured Products had debt of CA$57.6m, up from CA$45.0m in one year. On the flip side, it has CA$13.2m in cash leading to net debt of about CA$44.4m.

A Look At good natured Products' Liabilities

Zooming in on the latest balance sheet data, we can see that good natured Products had liabilities of CA$24.5m due within 12 months and liabilities of CA$60.0m due beyond that. Offsetting these obligations, it had cash of CA$13.2m as well as receivables valued at CA$8.59m due within 12 months. So it has liabilities totalling CA$62.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$25.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, good natured Products would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine good natured Products's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, good natured Products made a loss at the EBIT level, and saw its revenue drop to CA$88m, which is a fall of 4.6%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months good natured Products produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$4.4m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CA$9.7m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - good natured Products has 3 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.